Can BCE Continue To Raise Its Already Sizeable Dividend?

With its fat yield and steadily rising share price, BCE has been an ideal stock in recent years. Does the most recent dividend raise indicate more of the same for the years to come?

Iain Butler

Chief Investment Advisor, Motley Fool Canada Fool since November 2012 Iain Butler, CFA, is Lead Advisor on Discovery Canada 2017. He is also the Chief Investment Advisor for Motley Fool Canada and is the lead advisor on its flagship Stock Advisor Canada product. Before joining the Fool, Iain was a “buy-side” analyst and through this experience is well-versed in the idiosyncratic ways of the Canadian market. His investing interests are centred on scouring the market for interesting businesses that trade at reasonable prices and offer an appealing risk/reward relationship. Since joining the Fool in 2012, Iain dedicates each day to spreading Foolishness throughout this great country!

Published February 7, 2013 4:10 pm EST

BCE Inc. (TSX:BCE,NYSE:BCE) announced its 4^th quarter and 2012 results this morning and surprised a lot of investors by hiking the dividend, again. The company just boosted the dividend back in August by $0.10. The $0.06 increase takes the annual payment to $2.33 for a current yield of 5.2%. The $2.33 annual payment represents a 60% increase from the 4^th quarter of 2008, which begs the question, can the company keep this rising dividend trend going? Income hungry investors need to know!

To answer this query, we’ll go right to the cash flow statement where dividends are born. Tabled below is a short history of BCE’s free cash flow and dividends.

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Cash from ops	5,376	5,711	5,912	4,886	4,367	4,869	5,552
Cap ex	-3,121	-3,140	-2,986	-2,854	-2,998	-3,256	-3,515
Free cash	2,255	2,571	2,926	2,032	1,369	1,613	2,037
Dividends (Common)	-1,169	-1,147	-587	-1,201	-1,318	-1,520	-1,646
Payout rate	51.8%	44.6%	20.1%	59.1%	96.3%	94.2%	80.8%

Source: Capital IQ

Lot’s of numbers but the row to focus on is the Payout rate at the bottom. The company has been very friendly to shareholders in recent years by paying out a lot more of its free cash in the form of dividends. This has fuelled the growth that has occurred. However, now that BCE is paying out 80-90% of its free cash, this dividend growth strategy has largely been exhausted.

With the newly appointed annual dividend, BCE has itself a $1.8 billion annual cash obligation. Company literature expresses a desire to payout 65-75% of free cash flow in the form of dividends, even though the numbers above indicate they have exceeded this level in recent periods. Taking them at their word, and assuming a 70% payout, $2.6 billion of free cash flow is required to cover this obligation. That’s a 30% increase from the $2 billion in free cash that we calculated for 2012. The company is only guiding for a 5-9% increase in free cash flow. This means BCE is going to have to rely on other sources of cash, debt issuance comes to mind, to cover the $2.33 obligation. To say the least, it’s a stretch to assume there will be further dividend hikes out of BCE in 2013.

The Foolish Bottom Line

BCE Inc. has done a great job of rewarding shareholders by growing the dividend in recent years. This becomes even more impressive when you consider this is a company where top line growth is challenged. BCE expects revenue growth of 0-2% in 2013. There are only so many rabbits in a hat however and now that the company is paying out a sizeable chunk of free cash flow, dividend hikes going forward are unlikely to be as frequent, or generous for this telco.

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Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time. The Motley Fool has no positions in the stocks mentioned above.